Mutual Funds Jargon – Get Your Basics Right

Investments in the form of mutual funds have become a necessary instrument to utilize one’s money more effectively for future. As a layman, an investor only knows how to invest in mutual funds and get returns on the investments. Thus, investor’s concept remains limited up to a certain point where one only knows about few terms like SIP and NAV. When money is being put into funds, then it is better one gets educated about the different terms used in these markets. The mutual fund jargons when known, gives a clear picture of the concepts related to the investment world.

Mutual Fund Jargons

Let us now take a look into some jargons that are generally used by mutual fund experts in order to describe one’s investments, their expenses and various other terms:

AMC (Asset Management Company) – An AMC is the fund house or a company that manages the funds. It invests its client’s pooled funds into underlying securities that match one’s financial objectives. These companies provide a lot of options to the investors for diversification and try to minimize their risk in the best way possible. The mutual fund is a trust registered under Indian Trust Act. It is initiated by a sponsor. A sponsor is the one who acts alone or with a corporate to establish mutual fund. The sponsor then appoints AMC to manage investment, accounting, marketing and other functions pertaining to the fund.

NFO (New Fund Offer) – This term is given to a new mutual fund scheme. The NFO is similar to IPO (Initial Public Offering).In other words NFO can be defined as a security offering in which investors may purchase units of a closed or open-ended fund. Unlike IPO the price paid for the unit in NFO is fixed at Rs. 10.

AUM (Assets Under Management) –AUM is the total value of all investments currently being managed by the fund. For example the initial corpus amount invested was Rs. 1,000cr. but due to a rise in price of underlying security it has invested in, the value of units have also increased and now the corpus has become Rs. 1,100 cr. This particular figure is called AUM.

Units- An investor, by paying money to a company subscribes for shares; similarly by contributing into mutual fund scheme, an investor subscribe for the units. A unit holder of a mutual fund scheme is a part owner of the fund’s assets.

NAV(Net Asset Value) – NAV is the price of a unit of a fund. Value of a NAV fluctuates daily according to the changes in the underlying security. It is calculated by dividing the total value of the assets of the fund, less any liability, by total number of units issued by a mutual fund.

Entry load and Exit load: The charges which are imposed on the investor to cover up the administrative & few other expenses of the fund are called as load. The amount which is deducted at the time of investor’s entry into the scheme(at the time of buying the units) is called as entry load. Since 2009 entry load is banned by SEBI. Similarly, the amount which is deducted from the redemption or sale proceeds payable to the investor at the time of exit from the scheme is called as exit load. For example, generally there is exit load of 1% applicable if one redeems funds before 6 month or 1 year.

ELSS(Equity Linked Savings Scheme)- ELSS is a diversified concept of mutual funds that invests in various shared of different companies across different sectors. This kind of investments allows the investors to claim tax benefits under the section 80C of Income Tax Act. Investments in this scheme have a lock-in period of 3 years.

SIP (Systematic Investment Plan)– SIP refers to a fixed amount periodic investments in mutual fund schemes. These investments can be monthly or quarterly. SIP normally presents a win – win situation as it allows the investor to take advantage of the rupee-cost averaging.

SWP(Systematic Withdrawal Plan)- This is a service provided by mutual funds that normally provides a specific payout to the unitholders at pre-determined intervals generally monthly, quarterly, semi-annually, annually. This concept is normally useful to for those who want monthly payout to meet daily requirements during retirement. Check Systematic Withdrawal Plan benefits, taxation & examples

STP(Systematic Transfer Plan)– This is a kind of facility available to a customer where one can invest a lump sum amount into one scheme and then systematically transfer the specified amount to another scheme. Generally STP is used to transfer amount from debt scheme to equity scheme.

Open-ended Funds: An open-ended fund is the one that sells and repurchases the units all the time. Here, purchase and sale of units take place between investors and the mutual fund. A new investor can enter or exit the fund anytime; therefore, the corpus of this kind of fund keeps changing daily.

Close-ended fund: Unlike open-ended fund the corpus of close-ended fund remains fixed. It allows the investors to purchase their units through NFO and once the NFO closes then it does not allow the investors to buy or redeem their units directly through mutual funds. However, to provide liquidity, these units are listed on a stock exchange enabling the investors to buy or sell the units just like shares of a company.

Return on Investment – ROI measures the efficiency of an investment to compare its position among other investments. Simply put it shows the growth of an investment. This is expressed in the form of percentage. {CAGR (compounded annualised growth rate) is the best way to compare returns of any two products}

Total Expense Ratio (TER): Apart from risks and returns, investors should also look at the costs involved while investing in mutual funds. Though these costs are very small component, they can knock down the earnings of the investors if the fund does not perform well. TER involves audit fees, management fees, marketing and selling expenses, fund administration expenses. The NAV is net of all liabilities including TER; therefore a fund with lower TER can result into higher returns.

These are some of the terms that are normally used in the world of mutual fund and knowing such terms can be an added advantage. Are there any other terms which looks alien to you? Let us know and we’ll be happy to explain and clear your doubts.

Hemant Beniwal is a CERTIFIED FINANCIAL PLANNER and his Company Ark Primary Advisors Pvt Ltd is registered as an Investment Adviser with SEBI. Hemant is also a member of the Financial Planning Association, U.S.A and registered as a life planner with Kinder Institute of Life Planning, U.S.A.
He started his Financial Planning Practice & TFL Guide Blog in 2009. "The Financial Literates" is a dream & mission to make Indians Financial Literate.

How are above funds to start in SIP from this month, each fund 2000 Rs I am planning. How are these funds and fund allocation for moderate Risk Plan. I want to invest for 5-6 yrs minimum? What is u r suggestion ?